FuturesFiles Market Newsletter

Gold still Golden for Option Sellers

March 27, 2009

Name: James Cordier & Michael Gross

Company: Liberty Trading Group

Years Trading: 25

Favorite Movie: Wall Street & Jaws

Isn't it time you learned a strategy that can profit regardless of market direction?

Everybody knows the high odds associated with selling options. The problem is most investors don’t know how to harness it effectively. OptionSellers.com has established itself as the place to be for investors seeking option selling expertise.

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While not the safe haven it used to be for traditional investors, the gold market is a good place for Option Writers to collect high percentage premium in early 09

For the traders among us who want to write puts but are not totally convinced that commodities have made a low, the Gold market may be your salvation. For while industrial commodities markets such as copper, crude oil, and natural gas remain under the “double-whammy” influence of a rising dollar and plummeting global demand, gold remains at least partially immune to the bearish pressure.

Regardless of what may happen down the road, for the time being, the international community continues to plow money into the US dollar, feeling it is still the safest place to be. While the US Federal Reserve’s decision to buy US Treasuries seemed to give dollar bulls pause for a few days, it does not seem to be a strong enough force to counter a continued global flight to the dollar – at least over the short term. This is good for the value of the dollar, but will be a bearish factor hanging over commodities, including gold.

However, there is one key difference that separates gold from it’s blue collar cousins. Copper, oil, and gas all derive the majority of their demand from the commercial/industrial sectors. When economies slow, demand for these products slows.

Gold, however, derives a large portion of it’s overall demand from the investment sector. It is often investor demand that drives the price of gold – often far outstripping it’s demand from the commercial sector. Consequently, economic turmoil, strife or even recession can often be supportive to gold prices as wary investors often flock to gold as a haven.

Despite what price charts may show, this “flight to quality” by investors during the current financial crisis has and continues to occur. It is simply that the upwardly mobile US dollar has acted as a counterweight and has kept a lid on Gold prices.

Gold was a full participant in the commodities bull market that started in 2001 and climaxed with 2008’s spectacular highs. However, this difference in demand sources is one major reason for the disparity in price levels between industrial commodities and gold. Crude oil is still down nearly 65% from its 2008 highs. Copper is down over 55%. Gold is only off about 9% from it’s high’s last July and has already touched new all time highs in 2009. Again, investor demand is the difference.

It stands to reason then, that should the US dollar turn and begin heading decidedly lower, Gold prices have enough investor demand to drive it substantially higher. In addition to the flight to quality crowd, the inflation hedgers would almost assuredly come out in force. This would create a very bullish scenario for gold.

Nonetheless, we do not envision this happening over the near term. The Obama-led stimulus package and infrastructure spending will almost certainly increase the Federal debt and US money supply, eventually pressuring the dollar. However, the effects of these programs on the dollar are probably still months away.
In the near term, the dollar remains the place to be for the international crowd.

But investor demand for gold is not going away either, and should continue to grow as frustrated and/or jittery investors (who haven’t learned how to sell options yet) search for a safe avenue to stash capital.

Because of this, gold should, at the very least, continue to outperform many other commodities on a net basis. If global commodities prices continue to fall, gold should hold up well. If global commodities prices begin to recover or if the US dollar begins to weaken, gold should rise faster.

This does not mean we project a raging bull market in gold. But we do expect prices to remain relatively firm and that makes an excellent candidate for sellers of puts.

Option strikes are currently available at several hundred dollars below the existing market price for gold – price levels we do not feel will be threatened.

By selling gold puts, one does not necessarily need gold prices to rise. One only needs gold prices to stay above ones strike price. This is why we pursue a strategy of selling deep out of the money options. No one can predict what prices are going to do. As an option seller, you only look to project a price level the market will not reach.

We will be working with client portfolios over the next 7-10 days in selling deep out of the money put positions in the gold market. The price weakness of the past few sessions appears to be a good opportunity for position entries.

To learn more about selling options on commodities or building an option selling portfolio, feel free to visit us online at www.OptionSellers.com. You can also contact our offices by phone at 800-346-1949 or 813-472-5760 (international) if you would like to discuss a portfolio.

James Cordier is a financial author and head portfolio manager of Liberty Trading Group, an investment firm specializing exclusively in selling options. James’ market comments and option strategies are featured regularly by CNBC, The Wall Street Journal, Reuters World News and Bloomberg Television News. Michael Gross is a market analyst with Liberty Trading Group. Mr. Cordier’s and Mr. Gross’ book, The Complete Guide to Option Selling (McGraw-Hill 2005) is available at fine bookstores and online retailers now.

Liberty Trading Group
401 East Jackson Street
Suite 2340
Tampa, FL 33602
800-346-1949
www.OptionSellers.com

***The information in this article has been carefully compiled from sources believed to be reliable, but it's accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.

About the Author

James Cordier is president and head trader of Liberty Trading Group in Tampa, Florida. With over 25 years of option trading experience, he is quoted regularly on the futures markets in several national and international publications and news services including the Wall Street Journal, Barrons, Bloomberg World News and the BBC. James’ published articles on option writing have appeared in Futures Magazine (US), Energy Risk (UK), Your Trading Edge (Australia) and MoneyWorks Magazine (Dubai).

Mr. Cordier and his firm specialize in option writing and have developed a strategy of selling out of the money options on futures contracts that they share with clients of their brokerage. Cordier’s book, The Complete Guide to Option Selling (McGraw-Hill 2005) has inspired a generation of investors, was released in China in 2007 and is scheduled for re-release in a second edition later in 2009.

James' study of the commodities market began at age 14 when a silver coin collection sparked his interest in silver futures. He began his career at Heinold Commodities in Milwaukee as a broker in 1984. Several years of working with commercial business enabled him to not only build a solid knowledge base of market fundamentals but also establish of network of producers and end users that remains in place today.

In 1991 James began an eight year association with Allendale, Inc. in Chicago where he began publication of his newsletter, the Cordier Report. Success at Allendale eventually led to his own branch office in St. Petersburg, FL.

In 1999, having established a solid reputation and a certain level of notoriety within the industry, James founded Liberty Trading Group.

Despite giving market commentary to news outlets and financial websites and co-authoring The Complete Guide to Option Selling (Mcgraw Hill 2005), James still works directly with most client equity and never underestimates the importance of staying in close contact with his clientele’ on an individual basis.